BoJ YCC framework remains under pressure

Chris Scicluna
Emily Nicol

Market continues to push against the BoJ as reports suggest possible further YCC adjustment at next week’s Policy Board meeting
Amid reports in the Yomiuri newspaper that the BoJ will again review the side-effects of its monetary policy at its Policy Board meeting next week, and may consider additional steps to “correct distortions” in the yield curve, the YCC framework unsurprisingly remained under pressure today. 10Y JGB yields inevitably remained firmly at the upper range of the BoJ’s target, with 10Y swap rates rising to a new high (at one stage up to 0.94%) and 5Y yields rising to their highest since 2013 (above 0.28%). Take-up at today’s BoJ 10Y fixed-rate purchase operation was the highest so far at ¥2.81trn, while the BoJ also offered to buy extra bonds between 5-10Y maturities and held another 2Y 0% fixed-rate funds-supplying operation for banks.

While baseline views largely continue to expect the BoJ to want the dust to settle on December’s policy shift to allow for a more thorough assessment before further adjusting the YCC parameters further, there also seems no reason to expect the markets to ease up the pressure anytime soon. Indeed, the RBA’s experience, whereby it left it far too long to bring an end to its own YCC policy, such that its eventual exit was disorderly and damaging for credibility, suggests that the BoJ will appreciate the need not to remain too far behind the curve for too long. So, next week’s policy meeting seems very much subject to risks of another surprise from Kuroda.

BoJ regional report sees economic assessment revised higher in 4 out of 9 regions
The BoJ’s latest Regional Report released today suggested an improved economic backdrop in Japan over the past three months, with four out of the nine regions upwardly revising their economic assessments and most now considering output to be picking up moderately as the effects of the pandemic continue to wane. Admittedly, the production outlook was mixed among regions as supply constraints remained present. But most regions saw household consumption picking up due in part to the government’s travel support measures and amid moderate improvements in the employment and income situations. And although firms were starting to pass on higher input costs to consumers, encouragingly there were many reports to suggest that sales remained firm regardless of price hikes. Fixed investment was reportedly increasing too with some reports of previously postponed projects having resumed. And as firms suggested that winter bonuses had been increased, there were many cases where companies were planning to increase underlying salaries in the Spring wage round too, although some firms signalled difficulties in raising wages due to higher cost burdens elsewhere.

Japanese economy watchers remain downbeat about current conditions
The latest economy watchers survey, however, remained broadly downbeat. In particular, the headline current conditions index fell 0.2pt to 47.9 in December, a four-month low and still firmly below the key 50-improving level. This reflected a weakening in household demand related to services, while the manufacturing-related demand diffusion index slipped to its lowest since August 2020. Over the fourth quarter as a whole, the headline current conditions index (48.6) was some 2.7pts higher than the Q3 average but nevertheless still remained almost 4pts below the Q2 average.

Chinese inflationticks up but PPI surprises on downside and CPI remains subdued
Chinese inflation picked up slightly in December. But the consumer price data matched expectations while the producer price figures surprised on the downside to underscore that underlying pressures remain subdued. Of course, the full impact of the relaxation of the zero-Covid policy on inflation remains highly uncertain, given likely non-negligible but unpredictable impacts on demand and supply. For the time being, however, the PPI data remain consistent with deflation in the industrial sector, with prices down 0.7%Y/Y compared to the consensus on the BBG survey of -0.1%Y/Y. That, however, marked a rise of 0.6ppt from November due largely to base effects - while producer prices fell 0.5%M/M in December, that was less than half of the drop a year earlier and most components ticked higher. For example, producer price inflation in mining accelerated 5.6ppts to 1.7%Y/Y, with inflation of raw materials up almost 1ppt to 1.2%Y/Y in part likely buoyed by efforts to support investment. And deflation of manufactured items eased 0.5ppt to -2.7%Y/Y.

Producer price inflation of consumer goods, however, eased 0.2ppt to a three-month low of 1.8%Y/Y. And CPI inflation rose just 0.2ppt to 1.8%Y/Y, with prices unchanged on a month-on-month basis. The cause of the rise in consumer price inflation was almost entirely food, with prices accelerating 1.1ppts to be up 4.8%Y/Y, a three-month high, due to higher prices of vegetables and fruit. Excluding food, CPI would have been stable at 1.1%Y/Y for a third successive month. However, with energy prices slightly lower, core inflation ticked up 0.1ppt to a four-month high of 0.7%Y/Y, with the services component edging up 0.1ppt for a second successive month to 0.6%Y/Y.

ECB consumer survey to be watched for rising risks of de-anchored inflation expectations
Focus in the euro area today will be on the ECB consumer expectations survey results for November. This report will be watched for evidence of de-anchoring of price expectations – in October, the median forecast for inflation twelve months ahead rose 0.4ppt to 5.4%Y/Y, while the median forecast for inflation three years ahead moved sideways at 3.0%Y/Y.

US CPI inflation expected to slow sharply on lower energy prices and well-behaved core
Of course, all eyes today will be on the US December CPI report, which has now arguably become the most important of all global data releases over the course of the month. A drop in gasoline prices suggests that the energy component last month will decline for the second consecutive month, while increases in food prices have shown hints of slowing recently too. As such, our colleagues in Daiwa America expect total consumer prices to have declined (-0.1%M/M) for the first time since May 2020, in line with the current Bloomberg survey consensus. This would leave the annual rate down 0.6ppt to 6.5%Y/Y, the lowest since October 2021. Continued slowing in core goods price pressures is expected to see the core CPI rise just 0.2%M/M, close to the average in October and November (0.24%M/M) and well down on the average increase between January to September of 0.5%M/M), to leave the annual rate down 0.3ppt to 5.7%Y/Y. Of course, given expectations of another decent month of inflation data, a significant upside surprise could have ugly repercussions for the markets.

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